Steven Towns'  Instablog

The following was originally published on my website a week ago. SA has an increasing number of new book reviews it can re-post and thus didn't want to re-post one from 1999 unless it happened to be short on content, even though my second line begins with, "Don't let the date of the publication fool you into thinking his (Marty Whitman's) approach is dated." Anyhow, I tracked down a copy of Whitman and Martin Shubik's The Aggressive Conservative Investor (1979), and I'll tell you only having just opened it, the ideas in Value Investing: A Balanced Approach had certainly been cultivated over a long, long time.  If you aren't familiar with Whitman, perhaps this will compel you to learn more. And if you are familiar, it can only reinforce sound investment practice.

I recently finished reading Martin Whitman's, "Value Investing: A Balanced Approach" (1999). Don't let the date of publication fool you into thinking his approach is dated. In his interviews over the past few years one hears the same terms and mindset as described in the book. Whitman's firm, Third Avenue Management, is recognized for its track record in value and distress investing; the latter has led Whitman to be regarded as a "vulture" investor, which is apparently something he doesn't mind, especially considering all of his success. Value Investing will probably not be a fun read for casual or passive investors ("OPMIs" according to Whitman; more on that later) and it certainly won't be for traders who would have a hard time finding current assets on the balance sheet. However, for those devoted to value investing (thinking at times like control investors), this book is among the best.

Readers will appreciate Whitman's effort to hammer home what exactly is meant by true value investing. While he concedes that there are some similarities between what he calls value investing and Graham & Dodd fundamentalism, he for instance, emphasizes that the income statement (its primacy) is far less a concern, and macroeconomics is really not a concern -- that includes the trading levels of whatever market benchmarks. Interestingly, while he obviously is no proponent of academic finance (efficient markets/portfolio), he says, "no market participant is assumed to be stupid or crazy." Still, he mentions that the best in the value investing business, such as Buffett, are basically control activists, who are not in the business of predicting securities prices. Accordingly, they are not weighed down by "analytic baggage."

Regarding the mention of OPMI above, which stands for Outside Passive Minority Investors, Whitman argues there is an over-emphasis on stock prices as pertains to effectively the greater fool theory. Instead, Whitman espouses the view that there are other markets and means for which prices can be derived and attained (e.g. LBO, MBO, going private, M&A, etc), and thus focuses on what he calls "resource conversion activities." So, for Whitman, value investing is about what you buy, and it had better be safe and cheap. He talks of quantity and quality of assets, in addition to long-term wealth creation potential. One doesn't get the impression of cigar butt investing, and that is not Whitman's game either.

In conclusion, I want to leave readers with Whitman's argument that value investors use available information in a superior manner; lack of access to superior information (e.g. insider or material) is immaterial. Value Investing provides readers with very limited examples of actual how-to (value a company), mostly appearing as brief anecdotal references. However, the wisdom of what is value investing that Whitman shares is invaluable and found magnanimously within some 260 pages.

Disclosure: The author of does not have money invested in, or managed by, Third Avenue, nor does he have any business relationship.

A shareholder submitting a proposal for shareholder vote at an annual shareholder meeting (or via proxy) faces a litany of requirements. Very kind of corporations and the SEC to allow shareholders to submit proposals, but how convenient that boards of directors and executives are insulated from most proposals in more ways than one. Continue reading to see my “proposal” to GE.

For starters, companies file no-action requests (with the SEC) stemming from any deviation with the proposal submission rules. Later, should a proposal be included for shareholder vote, the company’s board has a largely unchecked right, which it always actions, to counter the proposal in the proxy statement. Finally, since even in the best case if a proposal is included and voted for in the majority, it is most likely non-binding, meaning the board of directors will do what many of them do best: ignore the vote and thus fail to represent the best interests of shareholders.

Which leads me to the sad history of GE’s share buybacks over the past 15 years. Post-financial crisis, I anticipated the return of the big GE buyback announcements, sooner rather than later (of course some repurchasing is necessary in order to camouflage stock option exercising). Unfortunately, shareholder proposals cannot mention any specifics about dividends or any formula related to dividends or buybacks. Nevertheless, and in spite of a market-beating 21% return by GE in 2010, which should suggest caution in terms of buyback timing and valuation, I share with you my “proposal.” While not valid in its current form, it can be rewritten and submitted for the annual meeting in 2012. But instead of waiting I will send a copy with reader comments as correspondence to GE. So pull up a GE stock chart while you read the following and note the performance of GE during the past five and ten year periods — also notice the recovery from the trough at the $6/share level in early 2009 and consider the missed opportunities to repurchase at prices in between.

WHEREAS between 2005 and 2007, General Electric (GE) repurchased approximately $25.7B of its shares, a period in which its stock traded between a low of $32/share in July 2006 and a high of $42/share in November 2007. During said period, GE’s stock returned 2.3% versus +24% by the Dow Jones Industrial Average, of which it is a constituent (dividend returns not factored in either). Buybacks totaling $1.25B continued into 2008, but GE’s buyback program was suspended in September, near the outset of the Great Financial Crisis, and its dividend was slashed by 68% in February of 2009.  Thus, not only did these share repurchases fail to manufacture competitive stock price returns, following a $12B common stock issuance in 2008 (as well as a nearly $3B preferred stock issuance) and another $620M-plus issuance in 2009, shares outstanding are now approaching 10.7 billion, meaning tens of billions of dollars spent on repurchases dating back to the 1990s have not been able to keep a lid on GE’s share count. The low of the past 15 years was just under 9.8 billion shares outstanding in 1997; there have not been below 10 billion shares out since 1999/2000, and as recently as 2005 the count was over 10.6 billion.

Therefore, based on the above depressing reality along with a most recent GE stock price of around $16/share, and word that buybacks will be resumed – as much as $11.6B, through 2013 – it is unequivocally evident that GE’s Board of Directors needs to eschew financial engineering (i.e. buybacks) and instead more prudently espouse a doctrine focused on tangibly rewarding shareholders: with dividends. Although there may be apathetic shareholders of GE (especially among institutions, including sponsors of index funds) that for what ever motivation overlook the importance of the distribution of profits to shareholders primarily via dividends while enabling largely self-serving and ostensibly wasteful stock buybacks, let it be understood that a not insignificant number of shareholders strongly prefer additional dividends over buybacks. And even more would, referring primarily to individuals who own shares through an investment fund, if they were cognizant of the aforementioned circumstances. A press release about share repurchases represents not even a promise, and when repurchases have been executed at GE, they have historically been untimely and thus unrewarding for shareholders.

RESOLVED: Following the 68% cut to GE’s dividend through the period ending October 2010, an accumulated $1.24/share gap exists in terms of what would have been paid out at the prior $0.31/share quarterly dividend. Thus, in light of the $11.6B authorized for buybacks through 2013, equivalent to approximately $1.08/share, shareholders ask the Board to authorize a special dividend payment of or near stated amount principally in lieu of GE repurchasing its stock. Furthermore, shareholders ask the Board to continue to increase GE’s dividend commensurate with increases in earnings, favoring dividends over stock repurchases – using a majority of the cash that previously would have been earmarked for share repurchases instead for special dividends.

[November 2010]

Disclosure: The author owns shares of GE.